M&A Advisory

Seller Financing: Buying a Business With Owner Financing

How seller notes work in a US business sale: size, rates, standby for SBA, security, and the worked math on both sides of the deal.

Palmstone Capital Research8 min read

Owner notes bridge price gaps, on real terms

If you're buying a business with seller financing, you're asking the person selling the company to act as your lender for part of the price. That sounds informal. It isn't. A seller note is a real debt instrument with a rate, a term, collateral, and consequences if it isn't paid.

In brokered US deals in the fourth quarter of 2025, seller financing made up roughly 6% to 16% of the purchase price depending on deal size, according to the IBBA and M&A Source Market Pulse survey. Most of the rest was cash at close: buyer equity plus senior or SBA debt. A 10% to 20% seller note is a realistic opening ask in an ordinary Main Street deal. Fully seller-financed purchases exist, but they're the exception, usually tied to a relationship, a distressed sale, or unusually strong collateral.

This page covers how the note actually works, why sellers agree to carry one, what protects the seller, what the buyer should watch for, and where these deals go wrong.

How a seller note works

A seller note is a promissory note: principal, interest rate, term, and a payment schedule, typically monthly principal and interest. Current Main Street pricing clusters at 8% to 10%, either fixed or set as prime plus 1 to 4 points. With bank prime at 6.75% in July 2026, that prices out to roughly 7.75% to 10.75%. The legal term usually runs 3 to 7 years, with amortization sometimes stretched to 5 to 10 years and a balloon payment covering the gap. Buyers should assume a 3 to 5 year balloon is normal, not a red flag, but it does mean refinancing risk sits somewhere in the structure.

There's usually no lender origination fee, since the seller isn't a bank. The buyer typically covers attorney drafting, a UCC filing, a lien search, and escrow or note-servicing costs. Prepayment is usually allowed, though a minimum-interest clause or a no-prepay window can protect the seller's expected yield.

Standby for an SBA-backed purchase

When the buyer is also using an SBA 7(a) loan, the rules get specific. SBA's SOP 50 10 8 requires at least a 10% equity injection on a complete change of ownership, and no more than half of that injection can come from a seller note. In the standard case, that's at least 5% buyer cash plus up to 5% qualifying seller debt. A note counted toward that injection has to sit on full standby for the entire life of the SBA loan: no principal, no interest, until the SBA debt is retired. Any additional seller note beyond that 5% is treated as subordinate debt, and its payment terms need lender approval and enough cash flow to support it alongside the senior debt.

The 7(a) loan itself is capped at $5 million, though since July 2026 a qualified borrower can combine up to $5 million of 7(a) with up to $5 million of 504 financing (504 proceeds are restricted to eligible fixed assets, not goodwill). Owners holding 20% or more of the acquiring entity give an unlimited personal guarantee regardless of how the deal is financed.

Why sellers offer a note at all

Two reasons show up constantly in real deals. First, a note bridges a valuation gap. If a buyer's lender will only support a price backed by verifiable cash flow, and the seller believes the business is worth more, a note lets the seller collect the difference over time instead of walking from the deal. Second, spreading the payment over several tax years can spread the seller's gain recognition under the installment method (IRC Section 453, reported on Form 6252), rather than triggering it all in the year of sale. That said, depreciation recapture and any inventory gain generally can't be deferred this way. They're taxed in the sale year even if the seller hasn't collected the cash yet, which is worth planning around before signing anything.

A note also lets a seller price in confidence about the business without asking the buyer to pay more cash than the deal can support. It's a tool for closing gaps, not a substitute for a fair price.

What protects the seller

A note by itself is just a payment promise. What protects the seller is everything wrapped around it:

A security agreement and UCC-1 filing. The note creates the debt; the security agreement creates the lien on business assets; the UCC-1 gives public notice and generally perfects it. Filing a UCC-1 without a valid security agreement underneath it does nothing.
Lien priority. If there's a senior bank or SBA loan, the seller signs a subordination or intercreditor agreement and sits behind that lender. The seller can be blocked from receiving payments or exercising remedies after a senior default, so lien position needs to be understood going in, not discovered later.
Personal guarantee and, where relevant, a stock pledge. These extend the seller's recourse beyond the business assets themselves.
Covenants and reporting. Financial reporting cadence, restrictions on new senior debt, and clear default and cure provisions make collection realistic if something goes wrong. Vague cure periods and no reporting covenant are common weaknesses in seller-drafted notes.
Underwriting the buyer like a lender would. A credit report with consent, a personal financial statement, proof of the buyer's own equity, operating references, and a background check are standard practice before a seller extends six or seven figures of credit.

None of this makes repossession automatic. If the buyer defaults, the note and security documents control notice, cure, and acceleration. A perfected secured seller can pursue collateral under state UCC law, but that's subject to the senior lender's position and any bankruptcy stay. Taking the business back is a legal process, not a light switch.

What the buyer should watch

From the buyer's side, the note is real debt on day one, and it changes the deal in ways that go beyond the sticker price:

Cash-equivalent price versus nominal price. A low rate, a payment holiday, or a long amortization can make the nominal price look higher than the deal's actual economic value. A $100,000 note at 8% over five years, discounted at a 12% risk-adjusted yield, is worth about $90,300 at closing. That $9,700 gap is the economic discount hidden inside the headline number, and it cuts both ways depending on who negotiated the rate.
Debt service on top of the rest of the capital stack. The seller note doesn't replace senior debt service; it stacks on top of it. Underwrite to at least 1.20x to 1.25x debt-service coverage after realistic replacement management pay, taxes, maintenance capex, and working capital, not the headline SDE or EBITDA figure.
SBA side-agreement risk. Paying anything on a note that's supposed to be on full standby, or agreeing informally to pay the seller outside the lender's file, can jeopardize the SBA guaranty and the entire closing.
A note is not an earnout. A seller note is fixed debt regardless of how the business performs after closing. An earnout is contingent on performance. Conflating the two in loose deal language creates tax, accounting, and enforcement problems later.

Worked example

Take a $1 million purchase, seller-only financing, no bank involved: $300,000 buyer cash plus a $700,000 seller note at 9%, amortized over 7 years. The monthly note payment runs approximately $11,265, or about $135,180 a year in debt service. At a 1.25x debt-service coverage target, the business needs at least roughly $168,975 of cash flow after paying a replacement manager, covering maintenance capex, and funding working capital, not the raw SDE the seller advertised.

Compare that with a blended SBA structure on the same $1 million price: $100,000 buyer cash, $800,000 SBA debt at roughly 9.25% over 10 years, and a $100,000 seller note at 8.5% over 5 years. Combined annual debt service comes to about $147,500, and the business needs approximately $184,400 of adjusted cash flow to clear 1.25x coverage. Note that concurrent payments on that seller note require the SBA lender's approval; it isn't automatic just because the note is small.

When it goes wrong

Most seller-financing failures trace back to a handful of repeat mistakes. Paying against an unverified SDE, one padded with family payroll, personal expenses, or cash sales, gives both sides a false sense of debt capacity. Buyers who use every dollar of cash for the down payment leave nothing for working capital, payroll buffer, or capex, and the note defaults not because the business failed but because it was undercapitalized from day one. Weak lien work, missing UCC searches, no payoff letters, an unclear collateral schedule, can leave a seller unsecured behind liens nobody checked for. A five-year balloon assumes a refinance will be available later at a workable rate; that assumption should be stress-tested against a revenue decline and a rate 200 to 300 basis points higher, not taken on faith. And missing lease, franchise, or license assignments can mean the buyer closes on a business that legally can't operate under its existing contracts.

FAQ

Can I buy a business with no money down using seller financing?

Legally possible in a private deal, but rare in practice, since the seller then carries nearly all the credit and operating risk. In a standard SBA-backed purchase, at least 10% equity injection is required, and no more than half of that can come from a qualifying seller note.

How much of the price will a seller usually finance?

Brokered deals in the fourth quarter of 2025 averaged roughly 6% to 16% seller financing depending on size tier. A 10% to 20% ask is a reasonable opening position. Seller-only deals without a bank can run 50% or higher, but that depends heavily on down payment, collateral, and buyer track record.

What interest rate should a seller note carry?

Current Main Street norms cluster around 8% to 10%, priced against prime, the buyer's credit, lien position, and collateral. The rate also has to clear the IRS's adequate-interest thresholds under IRC Sections 1274 and 483; the mid-term applicable federal rate in July 2026 was 4.35%.

Can seller financing be combined with an SBA 7(a) loan?

Yes. A note counted toward the required equity injection is capped at half of that injection and must sit on full standby for the life of the SBA loan. Any additional seller note is subordinate debt, and its payment terms need lender approval.

Does seller financing lower the seller's tax bill?

It can spread recognition of eligible gain across the years payments are received under the installment method. It does not defer interest income, inventory gain, or depreciation recapture, and the seller may owe some sale-year tax before collecting the cash to pay it. Asset allocation on Form 8594 drives much of the outcome.